Finland's Economic Situation (Part 1)

Transcription

1 econstor Der Open-Access-Publikationsserver der ZBW Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW Leibniz Information Centre for Economics Asplund, Rita Working Paper Flexibility and competitiveness: Labour market flexibility, innovation and organisational performance : Finnish national report ETLA Discussion Papers, The Research Institute of the Finnish Economy (ETLA), No. 875 Provided in Cooperation with: Research Institute of the Finnish Economy (ETLA), Helsinki Suggested Citation: Asplund, Rita (2003) : Flexibility and competitiveness: Labour market flexibility, innovation and organisational performance : Finnish national report, ETLA Discussion Papers, The Research Institute of the Finnish Economy (ETLA), No. 875 This Version is available at: Nutzungsbedingungen: Die ZBW räumt Ihnen als Nutzerin/Nutzer das unentgeltliche, räumlich unbeschränkte und zeitlich auf die Dauer des Schutzrechts beschränkte einfache Recht ein, das ausgewählte Werk im Rahmen der unter nachzulesenden vollständigen Nutzungsbedingungen zu vervielfältigen, mit denen die Nutzerin/der Nutzer sich durch die erste Nutzung einverstanden erklärt. Terms of use: The ZBW grants you, the user, the non-exclusive right to use the selected work free of charge, territorially unrestricted and within the time limit of the term of the property rights according to the terms specified at By the first use of the selected work the user agrees and declares to comply with these terms of use. zbw Leibniz-Informationszentrum Wirtschaft Leibniz Information Centre for Economics

2 ETLA ELINKEINOELÄMÄN TUTKIMUSLAITOS THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY Lönnrotinkatu 4 B Helsinki Finland Tel Telefax World Wide Web: Keskusteluaiheita Discussion papers No. 875 Rita Asplund FLEXIBILITY AND COMPETITIVENESS: LABOUR MARKET FLEXIBILITY, INNOVATION AND ORGANISATIONAL PERFORMANCE Finnish National Report Acknowledgements: This research is part of the EU funded research project Flexibility and Competitiveness: Labour Market Flexibility, Innovation and Organisational Performance (FlexCom, SERD ). I wish to thank Sinikka Littu and Reijo Mankinen for help with data gathering and Kaija Hyvönen-Rajecki for patient assistance with the literature search. I am also grateful to Jyrki Ali-Yrkkö, Laura Paija, Petri Rouvinen and Pekka Ylä-Anttila for their help and constructive comments on Chapter 3. My special thanks go to Jorma Rusanen at SAK for his many clarifications and corrections concerning the labour market related chapters of this report. Jenni Oksanen has contributed the text of Chapter 11. ISSN

3 ASPLUND, Rita, FLEXIBILITY AND COMPETITIVENESS: LABOUR MARKET FLEXI- BILITY, INNOVATION AND ORGANISATIONAL PERFORMANCE Finnish National Report. Helsinki: ETLA, Elinkeinoelämän Tutkimuslaitos, The Research Institute of the Finnish Economy, 2003, 109 p. (Keskusteluaiheita, Discussion Papers, ISSN ; No. 875). ABSTRACT: This overview report on flexibility and competitiveness for Finland starts with an outline of the performance and consequent restructuring of the Finnish economy over the past two decades. It then continues with a presentation and discussion of Finnish technology policy and the ICT miracle of the 1990s, which are key supporting factors behind the Finnish success story. The focus then shifts to an outline of the main features of labour market legislation and organisations, including the collective bargaining system implemented in Finnish working life, and the main modes of labour market flexibility. The report concludes with a summary of the main outcomes from interviews with representatives of the Ministry of Industry and Trade, the Ministry of Labour, the National Technology Agency (Tekes), the Confederation of Finnish Industry and Employers (TT) and the Central Organisation of Finnish Trade Unions (SAK). KEY WORDS: Finland, labour market flexibility, labour market institutions, technology policy JEL: O52 ASPLUND, Rita, JOUSTAVUUS JA KILPAILUKYKY: TYÖMARKKINOIDEN JOUSTA- VUUS, INNOVOINTI JA ORGANISAATIOMUUTOKSET Suomea koskeva maaraportti. Helsinki: ETLA, Elinkeinoelämän Tutkimuslaitos, The Research Institute of the Finnish Economy, 2003, 109 s. (Keskusteluaiheita, Discussion Papers, ISSN ; No. 875). TIIVISTELMÄ: Tämä Suomen talouden joustavuutta ja kilpailukykyä koskeva katsaus kuvaa ensin yleisesti taloudellista kehitystä ja siitä johtuvaa rakennemuutosta viimeisten kahden vuosikymmenen aikana. Katsauksessa siirrytään tämän jälkeen kuvailemaan suomalaista teknologiapolitiikkaa ja 1990-luvun ICT-ihmettä, jotka yhdessä vaikuttivat ratkaisevasti Suomen menestystarinaan. Seuraavaksi esitetään pääpiirteittäin työmarkkinalainsäädäntöä ja -instituutioita, mukaan lukien työelämää ohjaavaa sopimusjärjestelmää, sekä työmarkkinoiden joustavuuden päämuotoja. Katsauksen lopussa on yhteenveto eri vaikuttajatahojen edustajien kanssa tehdyissä haastatteluissa esiin tulleista ajatuksista ja näkökohdista. Haastateltavia tahoja olivat kauppa- ja teollisuusministeriö, työministeriö. Tekes, Teollisuuden ja Työantajain Keskusliitto (TT) sekä Suomen Ammattiliittojen Keskusjärjestö (SAK). AVAINSANAT: Suomi, työmarkkinoiden joustavuus, työmarkkinoiden instituutiot, teknologiapolitiikka JEL: O52

4 CONTENT 1. INTRODUCTION Executive summary: The Finnish economy in a nutshell Purpose of the study 2 2. ECONOMIC PERFORMANCE AND STRUCTURAL CHANGE Economic growth and the Nokia effect Productivity growth through restructuring Explosion in R&D investment and high innovation rankings New import and export patterns Profound industrial restructuring Outcome: Top competitiveness rankings 21 Literature of Chapter 2 22 Annex of Chapter 2: Internet penetration in Finland TECHNOLOGY POLICY AND THE ICT MIRACLE The emergence of Finnish technology policy NIS and cluster thinking drives technology policy The ICT cluster Major trends in public R&D funding Conclusions 33 Literature of Chapter LABOUR MARKET LEGISLATION Employment contracts legislation Working time legislation Pension legislation 40 Literature of Chapter LABOUR MARKET ORGANISATIONS AND COLLECTIVE BARGAINING Ministry of Labour Ministry of Social Affairs and Health Ministry of Education Labour market organisations Collective bargaining 58 Literature of Chapter 5 65

5 6. EMPLOYMENT TRENDS AND FLEXIBILITY Employment trends Unemployment trends Layoffs Foreign labour 72 Literature of Chapter WORKING TIME DEVELOPMENTS AND FLEXIBILITY Average working hours Overtime Unsocial hours and reduced working hours 81 Literature of Chapter FLEXIBLE FORMS OF WORK Part-time work Fixed-term work Temporary agency work and outsourcing Teleworking 92 Literature of Chapter WAGE DEVELOPMENTS AND FLEXIBILITY 96 Literature of Chapter FUNCTIONAL FLEXIBILITY THROUGH TRAINING AND QUALITY OF WORK Training and skills development Quality of working life 103 Literature of Chapter SUMMARY OF INTERVIEWS WITH POLICY MAKERS AND SOCIAL PARTNERS by Jenni Oksanen 106

6 1. INTRODUCTION 1.1 Executive summary: The Finnish economy in a nutshell Both the World Economic Forum (WEF) and the International Institute for Management Development (IMD) rank Finland amongst the most competitive countries in the world. Finland has gained this top position in just a few years due to a remarkable transition in the 1990s from an investment-driven to an innovation-driven economy. The foundations for this economic success were laid in previous decades through continuous increases in investment in research and development (R&D) and education, as well as policy actions in favour of liberalisation and deregulation. Hence, current competitiveness is based on long-term strategies rather than pure luck. The increase in R&D expenditure has been dramatic in the last two decades, with the GDP share of R&D expenditure being currently around 3.5%. In real terms, R&D expenditure more than doubled during the 1990s. A remarkable growth in business enterprise R&D expenditure mainly in the electronics industry explains a major part of the increase in total R&D expenditure. Today, business enterprises share of R&D expenditure amounts to three-fourths. Despite notable increases in government R&D funding, the public sector has not been able to keep pace with the private sector and its share in both total and business R&D expenditure has declined to a level much below the EU and OECD averages. The exceptional increase in public R&D input during the 1990s can be seen as an important ingredient of the fundamental change in industry policy thinking that started in the late 1980s. The concept of a national innovation system was adopted as an important instrument of Finnish science and technology policy as early as 1990, and in the mid 90s it was integrated with the concept of the knowledge-based society. The new economic policy that emerged from this redirection of strategies emphasises globalisation, innovations and productivity growth through increased knowledge and expertise. One of the main strengths of Finland s national innovation system is the collaboration between authorities, research institutes and companies. This institutionalised dialogue, which is evidently not very common internationally, definitely adds to the understanding of the interplay between technology policy and labour market flexibility actions underlying the economic success of the Finnish economy since the mid 90s. The deep economic crisis in the early 1990s speeded up industrial restructuring, and in combination with investment in R&D and other intangibles increasing at an unprecedented rate, this created a considerably stronger industrial base for the Finnish economy. Indeed, many of the industries and companies that survived over the recession years have performed extremely well in terms of productivity growth. Measured by total factor productivity, Finland has, by now, even outperformed the world leader in productivity, the USA. It is, therefore, fair to state that although industrial and technology policies have had a major bearing on business performance, the Finnish success story has been primarily business-driven rather than an outcome of public policy-making. The Finnish economy was growing at an exceptionally fast pace during the latter half of the 1990s. A major explanation for this extraordinary economic performance was the growth of export-based high-tech industries and, especially, of the information and com-

7 2 munication technology (ICT) industry. This growth performance has commonly been attributed to Nokia Corporation and the network that surrounds this internationally highly valued company. Apart from Nokia and its network of contractors, however, many other Finnish companies have also achieved exceptionally good economic performances. A major concern and challenge is how Finland s competitiveness can be maintained in the future. Finnish innovation performance so far also reveals major weaknesses. Among the most crucial are the weakly developed venture capital industry, the low proportion of SMEs innovating in-house and the low proportion of new market capitalisations. Moreover, Finland s current competitiveness appears less favourable when using more typical definitions of competitiveness than the one adopted by the two leading authorities on international competitiveness the country can offer an attractive environment for firms business activities. If this situation is conditional on all factors of production being fully employed and earning high returns and the long-term external balance of the country being maintained, then Finland s current competitiveness ranking might be considered too high. Measured by GDP per capita, Finland was, in 2001, only ninth among the 15 EU member states and fourteenth among WEF s 75 countries. Key explanations for the average performance of Finland in terms of standards of living can be sought on the labour market. The recession in the early 1990s resulted in a tremendous rise in unemployment, from one of the lowest in 1990 (close to 3%) to one of the highest (over 16%) within the OECD area. The recession expedited a structural change of employment from industry to services, and weeded out the less viable companies in Finnish industry, bringing high productiveness at the cost of lost employment. The mass unemployment that ensued is still today reflected in an unemployment rate that has stagnated at a rather high level, making long-term unemployment and labour market exclusion central social problems that Finland has to face. The situation is compounded by demographics characterised by a rapidly increasing share of the elderly dependent population over the employed population. Broadly speaking, labour market flexibility in Finland can be characterised as a combination of numerical and functional flexibility with little but slowly growing influence of wage flexibility. Major forms of numerical flexibility are redundancies, layoffs, temporary employment and working time adjustments. Functional flexibility is heavily focused on training and skills development, as well as other aspects of quality of working life. Wage flexibility is restricted by collective bargaining and high unionisation rates, for which reason employers have searched for alternative modes such as performance related pay schemes. The key features of the Finnish economy can, thus, be summarised as top rank performance in R&D input, knowledge-intensive growth, competitiveness and productivity growth, but less than average performance when it comes to employment and unemployment despite considerable recent improvements in the functioning of the labour market. 1.2 Purpose of the study Finnish competitiveness is largely built on knowledge and know-how. This requires flexibility and efficiently functioning national structures. The functioning of the labour market also has adopted to these criteria through increased flexibility. Such consensus has been

8 3 made possible by the active involvement of industry and labour market parts in technological policies and strategies. This lays the foundation for the present study and dictates the structuring of the content of this report on flexibility and competitiveness for Finland. The report starts with an outline of the performance and consequent restructuring of the Finnish economy over the past two decades. It then continues with a presentation and discussion of Finnish technology policy and the ICT miracle of the 1990s, which are key supporting factors behind the Finnish success story. Chapters 4 and 5 report on the main features of labour market legislation and organisations, as well as the collective bargaining system implemented in Finnish working life. The main modes of labour market flexibility are discussed in Chapters 6 to 10. The report is based on three sources: published and unpublished literature, available statistics and data sources, and interviews with key stakeholders. The interviews were conducted in December 2001 January 2002 with representatives of the Ministry of Industry and Trade, the Ministry of Labour, the National Technology Agency (Tekes), the Confederation of Finnish Industry and Employers (TT) and the Central Organisation of Finnish Trade Unions (SAK). Issues covered were labour market flexibility and its mechanisms, the role of legislation and labour market organisations, the interaction between technology and labour market policies and the preferred future developments of labour market flexibility in Finland. The report concludes with a summary of the main outcomes from these interviews (Chapter 11).

9 4 2. ECONOMIC PERFORMANCE AND STRUCTURAL CHANGE This chapter provides an overview of the extraordinary performance of the Finnish economy over the past few decades and the structural changes that this evolution has brought about. The emphasis is on trends in GDP and productivity growth, imports and exports, industrial structures and, ultimately, on competitiveness. The concomitant influence on the labour market in terms of employment, unemployment and the composition of the labour force is mainly analysed in the chapter focusing on employment trends and flexibility (Chapter 6). Only some overall employment growth and industry employment aspects are covered here, as a logical part of whole-economy performance and restructuring. 2.1 GDP growth and the Nokia effect GDP growth in Finland displays the turbulence that the Finnish economy has experienced over the past few decades (Figure 2.1). The economy was booming towards the end of the 1980s and, suddenly in the early 1990s, was plunged into its deepest recession since the 1930 crisis. 1 Signs of a recession were already discernible in autumn 1990, but the depth of it was not realised until 1991 when GDP growth became strongly negative for the first time in the post-war period, causing a notable drop in GDP also in absolute terms. 2 Negative growth rates followed in 1992 and 1993, albeit declining in magnitude. As a result, the volume of the GDP declined by 10.4% between 1990 and Due to the strong exportled growth that started in manufacturing in the latter half of 1993 and that gradually spread to the rest of the economy, GDP growth jumped in 1994 and remained substantially higher than in pre-recession years, up to the new millennium. In 2001 Finland experienced the largest decline in GDP growth among EU member states compared to the annual average growth for the period 1995 to 2001 (Table 2.1). The electro-technical industry and Nokia, in particular, have had a tremendous impact on GDP growth in post-recession years. This impact has taken the form of boosting GDP growth, as well as the amplitude of the fluctuations in annual growth rates. As is evident from Figure 2.1, the Nokia effect was greatest in 2000 when the company contributed 1.8 percentage points to the total growth of 5.6% in real GDP. The contribution of Nokia was, in other words, estimated to have been nearly one-third of total GDP growth. By 2001, both rates had dropped substantially GDP growth to just above one per cent and the Nokia effect to almost zero (0.2%). The same year, Nokia s share of GDP was close to 3%. Indeed, the strong influence of Nokia and the electro-technical industry on the Finnish economy is expected to have come to an end. Telecommunications have turned into a normal industry. 1 2 The recession of the early 1990s has been investigated in-depth, see e.g. the special issue of the journal Finnish Economic Papers 1996/1 and Santamäki-Vuori & Parviainen (1996). A slightly negative (-0.4) growth rate was experienced in 1976 due to the oil crisis.

10 5 Figure 2.1 Real GDP growth and the % point contribution to it by Nokia and the electro-technical industry, * % 8 6 Real GDP Nokia Elektro-technical industry * Source: ETLA s database and Ali-Yrkkö & Hermans (2002) and forecast of the 2002 effect Table 2.1 Average annual growth in real GDP in selected countries, % Finland Ireland Greece Netherlands EU United States Source: European Commission: European Competitiveness Report 2002, Table I.2. The average annual growth in real GDP was extremely rapid in Finland in the late 1990s even from an international perspective (Table 2.1). The only EU member states performing better were Ireland and Luxembourg. Important phenomena behind the high GDP growth rates in Finland in the latter half of the 1990s were an excellent productivity performance fuelled by high R&D intensity and the strong influence of technology-driven sectors producing spillovers to the rest of the economy. These underlying phenomena are discussed in the next sections.

11 6 2.2 Productivity growth through restructuring A major explanation for the outstanding GDP growth rates in the Finnish economy in the post-recession years can be found in the dramatic strengthening of the manufacturing total factor productivity (TFP). Indeed, in just a few years, Finnish manufacturing managed to close the TFP gap relative to the USA (Figure 2.2) and has, in recent years, probably even outperformed US manufacturing in this respect. Figure 2.2 Total factor productivity of Finnish manufacturing, USA = Source: Maliranta (1996) plus available updated numbers. The processes behind this extreme productivity performance as measured by TFP have been subject to in-depth research in recent years. 3 A key outcome is that Finnish manufacturing has undergone a process that can be characterised as creative destruction á la Schumpeter and that this process intensified dramatically during the deep recession years. In other words, the considerable improvement in manufacturing TFP is largely the outcome of less productive companies and plants having been destroyed and surviving firms and plants having become even more productive than before. This creative destruction process is also seen in official statistics. The total number of firms declined by no less than 33, 000 in the deep recession years, from over 218, 000 firms in 1990 to 185, 000 in 1994 (VATT 2000). As can be seen from Figure 2.3, the exit rate was high in all firm size categories, with the recovery being particularly rapid among small enterprises. 3 See the comprehensive analyses undertaken by Maliranta (1996, 2001, 2002).

12 7 Figure 2.3 Number of firms by size, = All Source: Statistics Finland Apart from fundamental restructuring at the micro level of the economy, TFP growth also was boosted by notable increases in business R&D investment, further supported by public R&D subsidies and intensified networking between companies, creating not least a functioning and efficient ICT cluster. The rapid growth in R&D intensity and the growing importance of ICT clustering and capital accumulation are discussed in later sections. Productivity performance, however, stands out as less impressive when looking at labour productivity instead of total factor productivity. The improvement in GDP growth towards the new millennium, as displayed in Table 2.1 above, was accompanied by a weakening performance in labour productivity, with Finland being outperformed by Ireland, Greece and Portugal (Table 2.2). The average annual growth of GDP per employed person for 1995 to 2001 was notably lower compared to the corresponding growth rate for 1990 to Table 2.2 Labour productivity growth in selected countries, % USA = 100 in 2001 Finland Ireland Greece Netherlands EU United States Note: Labour productivity growth is defined as growth of GDP per employed person. Source: European Commission: European Competitiveness Report 2002, Table I.4.

13 8 1995, and was, in effect, negative (-0.8) in Measured by labour productivity, Finland still lagged far behind the USA in 2001 (index = 77). This trend in output growth per employed person, of course, mirrors employment growth over these years. Compared to most other EU member states, the creation of new jobs has been rather satisfactory in Finland, with higher employment growth rates for the period 1995 to 2001 obtained only by Ireland, Spain, the Netherlands and Luxembourg (Table 2.3). More details on the evolution of employment and unemployment are provided in the section on employment trends in Chapter 6. Table 2.3 Employment growth in selected countries, % Employment rate in 2001 Finland Ireland Greece Netherlands EU United States Source: European Commission: European Competitiveness Report 2002, Table I.3. A similar downward trend is discernible when measuring productivity as output growth per hours worked instead of per employed person. From having reached an annual average rate of 3% over the period 1980 to 1990, hourly labour productivity growth had dropped to an average of 2.3% per annum for the period 1991 to 1999 (European Commission: European Competitiveness Report 2002, Table II.4). Figure 2.4 draws together the growth trend in real GDP, total hours worked and hourly labour productivity. The highly different performance of Finland, depending on whether focusing on total factor productivity or labour productivity, explains many of the different opinions about Finnish productivity performance that have been expressed and debated in Finland in recent years. Indeed, productivity growth has occasionally been claimed to be surprisingly weak in view of the physical capital, human resources and technological advances, including ICT, in use in, and available to, Finnish businesses. Evidently, this discrepancy in views relates strongly to whether the role of ICT is seen from the conventional supply-side angle or from the demand-side New Economy perspective. The large size of the ICT capital accumulation and technology-driven industries is reflected in total factor productivity growth and Finland is, indeed, a leading provider of ICT. Moreover, Finland has succeeded in creating an effective ICT cluster to support the diffusion of ICT both within the cluster and to the rest of the economy. But Finland is not an equally advanced user of ICT, which is in conformity with the finding of rather weak performance in terms of labour productivity. Further support for this argument is obtained when comparing Finland to another ICT leader, viz. the USA. While in the USA two-thirds of the contribution of ICT to labour productivity growth comes from use, the corresponding ratio for Finland is estimated to be only one-third. 4 4 The role of ICT use for labour productivity growth and GDP growth is analysed by e.g. Jalava & Pohjola (2001). Also see the European Commission s European Competitiveness Report for 2001.

14 9 Figure 2.4 Annual growth rates of real GDP, total hours worked and hourly labour productivity, % Real GDP Total hours worked Hourly labour productivity Source: ETLA s database In this context it may, finally, be noted that labour productivity growth seems to have reached much the same magnitude in business service sectors as in manufacturing. Labour productivity growth in total business sector services was estimated at an average of 2.1% per annum in the period from 1995 to 1999 (European Commission: European Competitiveness Report 2002, Table III.2). Of the nine countries covered in the comparison, a higher growth rate was obtained only for the USA. The excellent performance of Finnish business sector services is due to very high labour productivity growth in post and telecommunications (14.1%) and financial intermediation (12.6%). In view of the above discussion, the question arises whether the business service sectors, and these two services in particular, have been able to implement ICT in a much more efficient way than manufacturing. In other words, are business services the leading user and manufacturing the leading provider? 2.3 Explosion in R&D investment and high innovation rankings The steady increase in R&D investment in the 1980s speeded up during the 1990s. In the early 1980s, Finland allocated about 1% of GDP to R&D investment, as measured by gross domestic expenditure on R&D. At the turn of the decade, this share had reached the 2% level and, even before entering the new millennium, it had exceeded the target of 3% of GDP set by the Science and Technology Policy Council (STPC) 5 for 2000 (Figure 2.5). Preliminary statistics indicate that the share of R&D expenditure in GDP remained in Information on the Science and Technology Policy Council and its role in Finnish science and technology policy is provided in Chapter 3.

15 10 at the same level as in 2000, or 3.4%, but is estimated to have increased to 3.5% in Due to this rapid growth in R&D input, Finland now ranks second in the world. The only country with an even higher GDP share is Sweden. As in most other industrialised countries, an increasing share of R&D activities is performed by the business enterprise sector. In 1999 close to 70% of R&D was executed by business enterprises, compared to some 55% in the early 1980s. 6 In line with this, business R&D intensity (in domestic product of industry) has shown one of the highest annual growth rates (over 7%) in the OECD area since the early 1990s. In 1999, business R&D intensity was 3.2%, with only Sweden showing a higher figure (4.7%). The growth in business R&D intensity can be traced to increased R&D activities in virtually all industries in both manufacturing and services. Figure 2.5 R&D expenditure (% of GDP) compared with selected countries and economic areas, % * 2002* Finland Greece Netherlands Switzerland Ireland USA EU-15 Source: OECD STI and Statistics Finland The business enterprise sector not only performs but also funds an increasing share of R&D activities. Since the early 1980s, its funding share has expanded from about 55% to around 67% (in 1999). As a percentage of GDP, this corresponds to an increase from 0.65% to 2.1%, again a top-ranking figure among OECD countries. The funding share of the business enterprise sector is estimated to be 72% for Simultaneously, the relative importance of government funding of R&D has declined. This is due not to an absolute decrease in government sources devoted to R&D, but to a growth rate in public R&D funding that, in more recent years, has failed to keep pace with that in private R&D funding. Public R&D funding is outlined in more detail in Chapter 3. 6 These numbers for the business enterprise sector are taken from OECD (2001).

16 11 Nokia has contributed considerably to this rapid growth in R&D input. In 2001, Nokia accounted for approximately one-third of the total R&D expenditure and for an estimated share of 47% of business R&D input. Compared to the public R&D input, Nokia invests twice as much. Indeed, if Nokia is excluded the R&D share of GDP drops to 2.4% for However, this share exceeds clearly the EU average. The electronics industry accounts for most, some two-thirds, of total R&D expenditure. Furthermore, Nokia alone is estimated to be responsible for about half of the manufacturing R&D input, because the company still is spending a large share of its R&D budget in Finland. 8 Figure 2.6 Total ICT spending as a percentage of GDP compared to selected countries, % Finland Greece Netherlands Switzerland Ireland USA Source: WITSA (2002, p. 36) With this background, it is hardly surprising that ICT spending has also grown rapidly since the early 1990s. Indeed, over the period 1993 to 2001 the ICT market grew faster in Finland (11%) than in the USA (close to 7%). 9 ICT spending as a percentage of GDP increased from 5.1% in 1993 to 7.8% in 2000, but is estimated to have dropped slightly in 2001 (Figure 2.6). A minor slump also occurred in the Netherlands and Switzerland, while the situation remained unchanged in Greece. The ICT industry recession was reflected much stronger in the GDP share of ICT in Ireland and the USA. One notable feature, however, is that despite the downturn in 2001, in all these small European economies ICT spending as a percentage of GDP remained at a clearly higher level than in This was not the case for the USA Ali-Yrkkö & Hermans (2002). This share has been estimated to be approximately 60% (Ali-Yrkkö et al. 2000). This was also the case for Greece (almost 17%), Ireland (about 12%) and the Netherlands (over 7%), while Switzerland experienced one of the slowest growth rates (4.5%) in Western Europe. WITSA (2002, p. 27).

17 12 Many forces have contributed to the slowdown in total ICT spending. There are, nevertheless, trends in the opposite direction. Among these are e-commerce and Internet. For instance, the percentage of IT spending on e-business in Finland moved from 6% in 1999 to 10% in Greece experienced a similar trend (from 6% to 9%). Switzerland and Ireland were, respectively, 14% and 16% in 2001 from having been at the same level (9%) in The Netherlands saw the most moderate growth in e-business among these five nations (from 8% in 1999 to 10% in 2001). 10 Aggregate ICT spending is dominated by telecommunications. The growth in telecommunications spending over the period 1993 to 2001 was clearly higher than in total ICT spending for Greece (18.2% compared to 16.6% for total ICT spending); slightly higher for Finland (11.3% versus 10.9%); about the same for Ireland (about12%) and the Netherlands (7.4%); but notably lower for Switzerland (2.2% versus 4.5%). 11 In the USA, telecommunications spending also grew at a slower rate (4.9%) than total ICT spending (6.7%) in These success stories in R&D and ICT spending have pushed Finland high up in the innovation indicator rankings. In the European Commission 2001 Innovation scoreboard, Finland is top in the EU in four out of the eighteen indicators scored, viz. population with a tertiary education as a percentage of the year-old age classes; public R&D expenditures as a share of GDP; European Patent Office (EPO) high-tech patent applications per million population 12 ; and US Patent Office (USPTO) high-tech patent applications per million population (Table 2.4). In the case of business expenditure as a percentage of GDP, Finland is outperformed only by Sweden. Finland is ranked third when it comes to employment in high-tech services as a percentage of the total workforce; innovation expenditures as a percentage of all turnover in manufacturing; and per cent of manufacturing value-added in high-tech sectors. The innovation scoreboard accordingly lists the following major strengths of the Finnish economy relative to other EU member states: population with tertiary degree; public and business investment in R&D; high-tech patenting; and Internet penetration 13. Indicator numbers lower than the top 3 rankings, but still clearly above the EU average, are obtained for participation in life-long learning measured as a percentage of the year-olds; manufacturing SMEs involved in innovation co-operation; high-tech venture capital investment as a percentage of GDP; and home Internet access as a percentage of all households. Finland performs close to the EU average with respect to new S&E graduates as a percentage of the year-old age class; employment in medium-high and high-tech manufacturing as a share of the total workforce; innovation expenditures as a percentage of all turnover in manufacturing (which, nevertheless, is enough for third ranking, as noted above); new-to-market products as a percentage of all manufacturing sales; and share of ICT markets as a percentage of GDP The corresponding development in the USA was from 13% in 1999 to 17% in 2001 (WITSA 2002, p. 44). WITSA (2002), pp. 27 and 28. For more details, see Zoppè (2002). Some statistics highlighting Internet penetration are provided in the Annex of this chapter.

18 13 Table 2.4 The 2001 Innovation scoreboard main results for Finland Indicator EU mean Finland Ranking Relative size EU average = 100 S&E graduates / yrs 10.4% 10.4% 4 average 100 Population with tertiary ed. 21.2% 32.4% 1 above 153 Participation in life-long learning 8.4% 19.6% 4 above 233 Employed in med/high-tech manufacturing 7.8% 7.2% 7 average 92 Employed in high-tech services 3.2% 4.3% 3 above 134 Public R&D / GDP 0.66% 0.95% 1 above 144 Business R&D / GDP 1.19% 2.14% 2 above 188 High-tech EPO patents /pop above 449 High-tech USPTO patents / population above 323 SMEs innovating in-house 44.0% 27.4% 11 below 62 SMEs innovation co-op. 11.2% 19.9% 4 above 178 Innovation expenditure / total sales 3.7% 4.3% 3 average 116 High-tech venture capital / GDP 0.11% 1.38% 5 above 128 New capital raised / GDP 1.1% 0.3% 12 below 27 Sales of new-to-market products 6.5% 7.3% 5 average 112 Home internet access 28.0% 44% 4 above 157 ICT markets / GDP 6.0% 6.0% 9 average 100 High-tech value added in manufacturing Summary Innovation Index % 12.5% 3 above 152 Notes: Relative size illustrates whether the indicator is more than 20% above the EU average (above) or more than 20% below the EU average (below). Definitions of the indicators can be found in the text. Source: European Commission: 2001 Innovation scoreboard, different tables. A weak, and notably lower than EU average performance, is scored for two indicators: new capital raised on stock markets as a percentage of GDP and SMEs innovating in-house as a percentage of manufacturing SMEs. The latter is, in effect, seen as a major weakness relative to other EU member states. The summary innovation index is calculated to be 4.7, which ranks Finland third after Sweden (6.5) and the USA (5.6). The overall trend indicates that Finland has been rushing further ahead; the already high summary innovation index combines with an improvement rate far above the EU average. An even higher improvement rate is calculated for such as Ireland and Greece, but their innovation performance is notable lower than that of Finland. Ireland ranks eighth with a summary innovation index of 1.2, and Greece sixteenth (-7.9) with only Portugal having an even lower index (-8.7). The Netherlands ranks seventh (2.9), but in combination with an improvement rate much below the EU average, the country is classified as losing momentum.

19 New import and export patterns The fact that Finland, during the 1990s, managed to become one of the leading providers of ICT has profoundly reshaped the structure of Finnish imports and exports. Figure 2.7 reveals the substantial increase in the relative importance of exports of electronics and electromechanical products that occurred during the past decade. The figure includes statistics from 1960 to underscore how dramatic the change has been, away from the traditional export goods of wood, pulp and paper products. The recent turbulence in the ICT sector coupled with uncertainty in the global economy resulted in 2001 in a cut off in the exports of electronics and electromechanical products, which continued in Figure 2.7 Exports of goods by industry, % % Other goods Chemicals Metals Machinery Paper Wood Electronics 0 Source: Board of Customs Unfortunately, available statistics cannot tell about the corresponding change in the composition of imports of goods, as a similar decomposition has been produced only since The important role of electronics and electromechanical products in recent years also in imports is evident, nevertheless (Figure 2.8). Another way to illustrate the explosive change in the importance of ICT in Finnish trade is to look at the relative share of high-tech exports in total exports. This share was less than 7% in 1990 and some 11% in By 2000, it had increased to 23% or almost one-forth of total exports, a share very close to that of the UK but still lower than the corresponding share for Japan, the USA and the world leader, Ireland. A third alternative is to focus on the import and export activities related to telecommunications equipment. This is done in Figures 2.9 and 2.10, in comparison with selected countries. Finland s outstanding position as a provider of telecommunications equipment is evident from Figure 2.9. In 2000, the export share of telecommunications equipment in GDP was close to 7%, compared with only 1% in The corresponding share for the other countries is modest with Ireland coming closest with a share having increased to some 3% by 2000.

20 15 Figure 2.8 Imports of goods by industry, % % Other goods Chemicals Metals Machinery Paper Wood Electronics 0 Source: Board of Customs Figure 2.9 Exports of telecommunications equipment as a percentage of GDP compared to selected countries, % Finland Greece Netherlands Switzerland Ireland USA Source: Calculations based on The ITU World Telecommunication Indicators Database

21 16 Figure 2.10 Imports of telecommunications equipment as a percentage of GDP compared to selected countries, % Finland Greece Netherlands Switzerland Ireland USA Source: Calculations based on The ITU World Telecommunication Indicators Database Figure 2.11 Relative unit labour costs of Finnish industry, OECD/Finland, Ind Cost competitiveness Cost competitiveness excl. electro-technical industry Source: ETLA s database

22 17 A similar but much more moderate trend is seen in imports, mainly explained by the manufacture of components having been, to an increasing extent, moved abroad to the companies' own or sub-contractors plants (Figure 2.10). Still in 2000 the imports of telecommunications equipment was less than one per cent of GDP. Here, the conspicuous exception is Ireland, where the activities of multinational companies had raised the GDP share of imports of telecommunications equipment to 2% by the turn of the millennium. The Finnish success in trade, and especially with electronics and electromechanical products, has been strongly supported by a favourable development of relative unit labour costs of Finnish industry. This favourable trend, which started in the deep recession years of the early 1990s, is displayed in Figure 2.11, separately for total cost competitiveness and cost competitiveness when excluding the electro-technical industry. Indeed, the wages of Finnish engineers are relatively low compared to other industrialised countries, for which reason ICT has been comparatively cheap to develop. 2.5 Profound industrial restructuring Most fundamentally the strengthening of the Finnish economy through ICT has been reflected in industry structures with respect to both value added and employment. A traditional sector composition shows that the industry sector still leads when tracing volume trends (Figure 2.12), while decomposition according to relative shares reveals the rapidly growing role of services in total output (Figure 2.13). The share of the services sector in real GDP has increased to over 60%, with business sector services covering a Figure 2.12 Volume trend in GDP, agriculture, industry and services, = GDP Agriculture Industry Services Source: ETLA s database

23 18 Figure 2.13 Relative shares of agriculture, industry and services in real GDP, % Agriculture Industry Market services Public services Other services Source: ETLA s database Figure 2.14 Compositional structure of manufacturing value added, % Forestry Electronics Other metal Other manufacturing Source: ETLA s database

24 19 steadily growing portion of the sector s output. The relative share of industry has decreased to one-third of real GDP, while agriculture contributes less than 4%. 14 A closer look at the compositional structure of manufacturing reveals, as is also to be expected, a tremendous increase in the value added share of the electro-technical industry (Figure 2.14). Moreover, the expansion of this industry has occurred at the expense of the consumer goods industry; the relative shares in total manufacturing value added of the forest and metal industries have remained approximately unchanged over the past decades. At the turn of the millennium, the four broad industry categories contributed an almost equally large share to total manufacturing value added. The corresponding distribution of those employed in manufacturing is shown in Figure The employment share of the electro-technical industry has doubled between 1980 and 2002, from below 7% to nearly 15%. A slight improvement in the relative employment share is noted for the rest of the metal industry. The forest industry has seen a corresponding decline in its employment share. A much more notable drop has occurred in the employment share of other manufacturing industries, which in 2002 employed an only somewhat larger share (some 37%) than the category of other metal industries (about 33%). Figure 2.15 Compositional structure of manufacturing employment, % Forestry Electronics Other metal Other manufacturing Source: ETLA s database 14 Due to differences in productivity growth, this traditional way of dividing the economy into sectors displays even larger compositional changes when it comes to employment (see Chapter 6).

25 20 Figure 2.16 Compositional structure of service sector value added, % Trade Hotels etc. Transport Financial intermediation Administration Education Health Other services Real estate Source: ETLA s database Figure 2.17 Compositional structure of service sector employment, % Trade Hotels etc. Transport Financial intermediation Administration Education Health Other services Real estate Source: ETLA s database

26 21 The corresponding trends in the services sector are displayed in Figure 2.16 and Figure The most conspicuous change has occurred in the case of services related to real estate. The relative share of real estate in total value added of the services sector had by 2002 increased to over 27%, compared to less than 20% in Its relative employment share of total service sector employment had, however, grown more slowly, to just over 14% in 2002 from less than 8% in This further supports the European Commission results of considerable labour productivity growth in services in Finland, especially in the 1990s, referred to above. 2.6 Outcome: Top competitiveness rankings The extraordinary performance of the Finnish economy in post-recession years up to the new millennium in terms of economic and (total factor) productivity growth has, thus, been largely driven by tremendous increases in business R&D and ICT investment. A key supportive ingredient of this process has been the science and technology policy pursued by the government, for which reason it is well justified to look in more detail at industrial policy thinking in Finland and its evolution over time. This is done in the next chapter. The joint efforts of the private sector and the government to increase R&D expenditure and to create a functioning and efficient ICT cluster have also contributed substantially to the top rankings that Finland has achieved in recent years in international competitiveness comparisons. 15 In its 2001 comparison of 75 economies, the World Economic Forum (WEF) ranked Finland the most competitive nation, albeit the USA outperformed Finland in the 2002 comparison. These top rankings were reached both according to the Microeconomic Competitiveness Index (MICI) and the Growth Competitiveness Index (GCI). According to the latter, Finland ranked only sixth in 2000, eleventh in 1999, and even worse in 1996 to Of the factors emphasised by WEF as supporting the Finnish competitiveness rankings, most are linked to science and technology efforts of the private and public sectors. The International Institute for Management Development (IMD), on the other hand, ranked Finland third in 2001, out of 49, after the USA and Singapore. By 2003, Finland had outperformed Singapore, ranking first among 29 countries with a population less than 20 million. In view of Finland s low position in 1993 (25 th out of 38 countries), the improvement in ranking as been remarkable. Any improvement in rankings should, though, be also evaluated against changes in the countries covered in each year in the comparisons. These successful competitiveness rankings are, no doubt, positive for Finland in an international perspective. They do not, however, mean that Finland can sit back and admire its excellence. Instead the long-term perspective should be the guiding one also in the future, especially since considerable economic challenges remain, the most severe being unemployment. 15 For a more detailed presentation of the Finnish competitiveness rankings and a discussion of their relevance and accuracy, see Rouvinen (2001).